Sunday, January 12, 2014

Tribal Reality and Extant Reality

(This is adapted from a rather silly speech I like to give to my finance classes when the slide projector breaks. Warning: includes blatant exaggerations and shoddy pop history.)

How do we know something? Two ways. Either we find out for ourselves, or somebody tells us. For example, I can discover that there's a table in the middle of the room by stubbing my toe on it, or by someone saying "Hey watch out, there's a table there."

Why would we rely on second-hand information instead of first-hand information? Time and effort, for one thing. It's usually easier to ask people stuff - or check Google, or Wikipedia, or a book - than to go find out yourself. This is especially true of things like the mass of Jupiter, which is very hard for a person to measure entirely on their own.

Now, since we rely so much on getting info from others, it's only natural that humans have evolved a form of communication that seems like it's delivering information, but is actually not. It's called "bullshit". Bullshit is defined as "stuff that people say without regard to whether it's true or not" (see Harry Frankfurt's essay on the subject). Bullshit can be fun, as when you sit around and bullshit with your friends. Bullshit can be useful, and in fact underlies many of our industries. And bullshit can be harmful, when people mistake it for real, useful information. ("Bullshit" can also be applied to human-made institutions or procedures that don't accomplish their ostensible purpose.)

But there's one kind of bullshit that I want to discuss today. It's what I call "Tribal Reality". People want to belong to tribes, so they have to have some way of signaling "Hey, I'm in your tribe, buddy!" Sometimes they wear similar clothes. Sometimes they have similar accents. And sometimes they say similar bullshit. For example, in America, conservatives signify their membership in the Conservative Tribe by saying things like "Evolution isn't true."

Do American conservatives really believe evolution isn't true? That's kind of a philosophical question. I'm sure they feel an emotional upwelling of "rightness" when they say "Evolution isn't true". But if they had to bet on it - if someone with conclusive data asked them "Is evolution true, yes or no?", and if they got the answer wrong a giant hammer would swing down and crush their heads - I think they'd answer that it is true. Research shows that when you pay people to get answers right, their tribal belief gaps mostly disappear.

But it really doesn't matter. Conservatives don't say "Evolution isn't true" in order to convey real, useful information. Whether evolution is true, or whether there was a Big Bang, or whether the Earth is balanced on a giant stack of turtles, doesn't really affect their lives one way or the other. But membership in a group really does affect their lives, and so they repeat bullshit like "Evolution isn't true" back and forth to each other because it binds them together to do so. It's the same reason Japanese rightists deny the Japanese army's WW2-era sex slavery, or conspiracy theorists used to talk about "black helicopters".

Now, I'm not saying that Tribal Reality is bad, just because it's bullshit. It's a very powerful technology. After all, closer-knit tribes tend to more willing to provide public goods. So tribe-forming technologies, including Tribal Reality bullshit, can be incredibly good for human welfare. Or, of course, they can be bad, causing things like wars.

I've noticed an interesting thing about bullshit: There's no word for it in Japanese. Just as some Japanese words (like 適当) can't be translated without a long and complicated explanation, a proper understanding of "bullshit" typically occupies an entire dinner party in Japan. Observing this fact, I came up with my theory of what makes (or made) Western Civilization unique.

Tribal Reality and Western Civilization

Back in the days of low technology, one person's observation was just about as powerful as another's. If there's a table in the room, any non-blind person can see it. Without technology, everything is like that. So in a low-tech society, while you have to worry that people might be lying to you, you don't have to worry that someone else can see something important that you can't. Get enough people in the room, and the majority will always be right. In other words, in a low tech society, Consensus Reality (which occasionally is Tribal Reality) is as good as you're ever going to get.

Of course, in low-tech societies, there were always a few people who insisted that they could see a reality that others couldn't see. These people often became cult leaders, and the successful ones became prophets of new religions. But these new religions brought war and social upheaval, so traditional societies put mechanisms in place to stamp these dangerous people out. Cult leaders were burned as heretics. It was the sensible thing to do.

But then something changed: Technology reached the point where one person, wielding superior tech and possessing the specialized knowledge to use it, could uncover useful information that had the power to really affect people's lives. With his telescope and astronomical data, Galileo could learn that the Earth really did go around the Sun. With his chemistry equipment and microscope and epidemiological data, Pasteur could learn that tiny invisible microbes caused infectious diseases. If a million people disagreed with Galileo or Pasteur, the million would be wrong, and the one would be right.

This was the first time in human history that this had ever happened.

At first, Western society reacted the way any sensible low-tech society would - by punishing the people who claimed to have some special knowledge. But as it became clear that This Time Really Was Different, Western civilization grew to embrace the iconoclast. The lone inventor, the brave whistleblower, the brilliant scientist, the skeptic - these are some of our greatest heroes. "Think different", our billboards tell us. "If all your friends jumped off a bridge, would you jump off a bridge too?" is a question we ask our kids, and we teach them to say "No!" (even though if you think about it, the sensible answer is probably "Yes").

Western civilization got a head start in science, so much of the scientific knowledge now enjoyed in other countries was discovered in the West. Science is powered by iconoclasts, doubters, and skeptics, so Western civilization had to learn to love doubt, iconoclasm, and skepticism. And it paid off - the scientists of the West delivered technologies that temporarily made Western countries the most powerful in the world.

This is not to say that Western civilization got rid of Tribal Reality. We still have a ton of it. Nor is it to say that we expunged bullshit; we still have huge amounts, much of it incredibly useful. But what Western civilization did, I think, is to be the first to perceive the existence of bullshit. Only when you emerge up from the ocean into the air can you perceive the ocean. Western civilization, emerging from the warm, comforting ocean of bullshit, perceived that it had been swimming in bullshit all along.

What Western civilization had done is to discover a kind of reality that was beyond Tribal Reality, and was beyond even the more general phenomenon of Consensus Reality. They discovered Extant Reality, the reality that hits you in the head even if you and everyone you know fails to believe in it. Extant Reality is a pitiless, cold, frightening thing. It's a monster from an H.P. Lovecraft story. It is not something you would choose to have exist, but that's the point - you don't get to choose. Western civilization, by being the first to get past that technological critical point, was the first to be forced to reconcile itself to the inability of Tribal Reality to stave off Extant Reality. So the West was the first to begin the hard, painstaking, uncertain task of bending Extant Reality to the will of humankind.

And that was Western Civilization's "secret sauce". It would be a pity to abandon it.

Reality and Financial Markets

But let's get to another point: How to make money. In financial markets, the Western fetish for iconoclasm can run into problems. This is because of the "Wisdom of Crowds". Financial markets often do a good job of aggregating the diverse information of a large group of people. When information is aggregated, the average guess of the group becomes more accurate than the individual guess of any one person in the group. You can see an example of this if you take the average of people's guesses of how many jellybeans are in a jar - the average will usually beat all, or all but a couple, of the individual guesses. This is the Wisdom of Crowds at work.

The Wisdom of Crowds is present in financial markets. It is possible to outguess the crowd, but not easily, and not all the time. And whenever you do outguess the crowd, it will be costly to do so. This is just the "Efficient Market Hypothesis", which is actually a general idea rather than a formal hypothesis. It basically says that in financial markets, Consensus Reality is generally as good as you're going to get. This means that you shouldn't spend too much time and effort trying to be Pasteur or Galileo; if you do, it won't be worth the cost, and if you try, you're just going to end up being a sucker for a hedge fund with a more powerful telescope...er, supercomputer. Behavioral finance says that people' overconfidence will make them too willing to believe that they've uncovered some hitherto unexplored corner off Extant Reality, when they really haven't.

Some people disagree with the EMH, of course. Proponents of fundamental analysis think that lots of people can be iconoclastic Galileos and Pasteurs, by careful, rational examination of companies. Of course if everyone does this, the return to doing it will drop, but maybe there is room for a reasonably large number of Galileos. Maybe there is a lot of information out there to uncover, and maybe a lot of people can simultaneously reap rewards for uncovering it.

But there's also another idea, which is also part of behavioral finance, and which I see slowly gaining traction. This is the idea that occasionally, the Wisdom of Crowds breaks down catastrophically. Once in a great while, Consensus Reality gets tricked by Tribal Reality. When Tribal Reality takes over, people repeat bullshit "stories" to each other, until they actually become willing to bet on them. Those bets push up prices, which lends the bullshit narrative credence, making more people join the "noise trader" herd, and it snowballs into a gigantic bubble.

Now, it's an open question as to whether you can make money shorting a bubble. Sometimes you think you see a bubble but it's not really one at all. Sometimes you can see it, but it might be wiser to ride it for a while instead of shorting. And the decision to ride it, short it, or stay on the sidelines generally carries lots of risk. So I'm not saying "Go find some bubbles and short them".

But what you can do is this: When you invest, avoid Tribal Reality like the plague. Do not believe in bullshit "stories" and "narratives". Do not listen to people's financial advice just because they are the same race or religion or political ideology as you. Do not buy into fads or fashions. In other words, no matter how warm and fuzzy Tribal Reality makes you feel, when it comes to your hard-earned cash, don't bet on bullshit.

51 comments:

I know this is a broad sketch, but Galileo & Pasteur were 300 years apart. And there was a bunch of technology elsewhere-- didn't they have movable type in Korea in like 1300? Using generalizations to understand historical developments is a Good Thing, but I wonder if these generalizations are a bit too sweeping.

Larger point, though, about the usefulness in certain contexts, & perils, of tribal reality, is indisputable.

"At first, Western society reacted the way any sensible low-tech society would - by punishing the people who claimed to have some special knowledge."

OK, Noah, total nonsense. Bruno was not punished because he had some special scientific knowledge: what exactly would that have been? He was punished for his heretical religious views. (No, I am not in favor of that, but that is totally different than your take.) And, of course, the medieval world was full of people with special knowledge: that is why it started universities, was able to build cathedrals, made huge technical advances, critiqued Aristotle, etc.

"With his telescope and astronomical data, Galileo could learn that the Earth really did go around the Sun..."

Well, no he didn't. He collected some evidence it might, but all of his evidence was consistent with Brahe's model. He *believed* the earth went around the sun. But even that, the theory of relativity teaches us, is only a partial view: we can really model it either way.

"the scientists of the West delivered technologies that temporarily made Western countries the most powerful in the world..."

Except they didn't: hardly any technological advances before the mid-19th century were driven by science. In fact, engineers often explicitly avoided dealing with scientists: tey were all "head in the cloud" and could not do practical work.

"What Western civilization had done is to discover a kind of reality that was beyond Tribal Reality, and was beyond even the more general phenomenon of Consensus Reality. They discovered Extant Reality..."

I can't believe someone could really think this: no one before our great, Western heroes ever knew that if a rock hit you in the head, it would hurt? So long as the tribe said it wouldn't, it wouldn't?!

Yes, here is a lingering tribal reality in the West: the tribal reality of the scientistic who still believe this fairy tale version of history despite professional historians repeatedly having debunked it over the last century.

Bruno was not punished because he had some special scientific knowledge: what exactly would that have been? He was punished for his heretical religious views.

To the medieval Church, those were the same thing. That's my point. But if you don't like the Bruno example, the Galileo example is pretty classic and unambiguous.

And, of course, the medieval world was full of people with special knowledge

Knowledge, yes. Knowledge-gathering abilities? I doubt it. See the difference?

But even that, the theory of relativity teaches us, is only a partial view: we can really model it either way.

Actually, no. The theory of (Galilean) relativity applies to inertial reference frames; orbits involve acceleration, which is not relative. The fact that bodies orbit each other (instead of one orbiting the other) was derived by Newton.

I can't believe someone could really think this: no one before our great, Western heroes ever knew that if a rock hit you in the head, it would hurt? So long as the tribe said it wouldn't, it wouldn't?!

Seems a little crazy, right? But there are, RIGHT NOW, farmers in Kansas and the panhandle of Texas who deny the existence of climate change even as it destroys their farms and livelihoods. They are being hit in the head with a rock whose existence they are denying.

You appearing to be swimming against the tide of group/tribal think which is seemingly increasingly backed by law and vested interest money. The logic for NSA/GCHQ surveillance is for me the silencing of people's thoughts and freedoms which inevitably means clamping down on people whose views deviate (whether they are tribal or free thinkers).

Is this based on any account of actual tribes or tribal societies? Or rather an account of "How I can imagine it to (have) be(en)?" - like the plot of "The Queen", the 2006 movie.

No citricism intended either way, just interested, as it is not clear to me. Perhaps the hint that it is based on a "rather silly speech" should make it clear (that it's rather imagination), but I am not sure.

More importantly, Noah, as there is another photo of you now: Do you have a round face, or are you what could be called "vollschlank" (i.e. "full-slim") in German?

I've noticed an interesting thing about bullshit: There's no word for it in Japanese. ... Observing this fact, I came up with my theory of what makes (or made) Western Civilization unique.

Your logic reminds me of a Stalin-era Soviet history book I've once read, which started with the observation that one can say "heroic deed" using just one word in Russian, and used that to prove that Russians were the only nation capable of courage.

Even in the West only 10 or 20% of the population ever really believed in the existence of Extant Reality (objective reality) - the other 80 or 90% were the Romantics believing in fairies, magic and expansionary austerity and spouting crap like "perception is reality." The scientific rationalists have been influential out of proportion to their numbers only because their ideas worked better.

I am partial to the Fama's view of the market than Shiller. 99.9% of the time market are efficient and the Fama model is the most accurate representation of reality. Occasionally you get inefficiencies but they are very hard to exploit to get excesses returns. For example, shorting overvalued tech stocks in the 90's would have resulted in a total loss unless you timed the top precisely or had a lot of capital. By excess returns you have to increase your whole account by an amount exceeding a benchmark. A lot of traders like to brag about their returns on certain trades but these trades are often very small relative to their entire account. Pundits said Facebook was a bubble when it went IPO and now its stock price has surged 50%. Those who shorted and didn't cover lost everything.

There was a controversy kicked up by Gene Callahan a little while back over whether there was really rampant persecution of scientists in the medieval/Renaissance era. For the most part the Church didn't care about science and felt free to change its position on such things. But Bruno, who was frankly a mystic, was punished for his philosophical/religious ideas.

Also, my understanding of global warming was that it's been on pause for about ten years, and hasn't caused much damage so far, the real worry is about what will happen in the future. So farmers aren't noticing their farms being ruined because the farms aren't being ruined (at least to any greater extent than normal).

Great post."...occasionally, the Wisdom of Crowds breaks down catastrophically. Once in a great while, Consensus Reality gets tricked by Tribal Reality. When Tribal Reality takes over, people repeat bullshit "stories" to each other, until they actually become willing to bet on them. Those bets push up prices, which lends the bullshit narrative credence, making more people join the "noise trader" herd, and it snowballs into a gigantic bubble."

Consider the possibility that this happens when the negative unintended cousniquenses of a stable political/economic system start to outweigh the positive effects. In other words, what onced actually worked no longer is effective and situational truth becomes bullshit.

but belief in policies persists because guiding mythologies grow around the situational truths.

Example...When the economy is operating at full employment it is easy to see the truth that unemployment benefits can discourage worker participation. Yet somehow that morphs into some people believing that when there are no jobs to be had, that taking away unemployment benefits will create jobs.

This was entertaining. (And who says every blog post has to be insightful in some new and profound way? Entertaining is rare enough.)

For fun, what would you consider liberal bullshit? I would put global warming at the top of the list. I'm not a global warming skeptic, but I am skeptical that most liberals really care whether or not global warming is true. GM-free and organic food mania also strike me as good candidates. I'm struggling (perhaps because I am to mired in the tribal sewage) to think of non-Green examples.

Definitely anti-GMO hysteria is bullshit. Global warming? Well *I'm* worried about it. Maybe some people are out there who are raising the alarm who aren't actually worried, but I know lots of people are honestly worried.

One of the biggest liberal BS ideas is that Affirmative Action is not racist.

Racism is treating people differently because of their race. AA treats people differently because of their race. But it's not racism, because of prior anti-Black racism (by the Jim Crow Democratic Party).

One can fight fire with fire, or with water. But to say one is using water when one is fire is BS.

Most Dem Party positions about poverty and gov't policies to reduce poverty are BS, and designed to allow Dems to label those opposing such policies as racists or anti-poor, even when the policy effects are terrible.

How bad does Dem loving Detroit have to be before the dumb Dem voters their start changing the party they vote for? (In Science, it is usually a generation, where the old generation of "true believers" dies out and the young ones are able to accept new theories to account for the results.)

I think I see the problem. If you look at the poll, what it says is, if you believe in evolution, do you think this occurs via natural selection or because of some divine intervention. This question structure is flawed. If you are a religious person, chances are you believe in both. You believe that the maker guides the process, but that by outward appearances, natural selection is at work.

What you are saying is that the majority of conservatives either: 1). don't believe in evolution, or 2). believe in evolution, but believe it is guided by divine intervention. This is correct according to the poll. However, this is very different from saying that the majority of conservatives don't believe in evolution.

Interesting that you say there's no Japanese term for 'bullshit' because in Hawaii the most common synonym we have for BS is a Japanese term (shibai*).

* I can confirm the word is not used in Japan the way it is in Hawaii though. Also the wikipedia for shibai appears to have been taken over by lizard people; the word is always used to mean something almost identical to bullshit (but most commonly in political/corporate contexts).

This is pretty much the right defense of the EMH. It is basically right. I know you weren't trying to be exhaustive, but you were basically implying that what we know that is true, and what we know that isn't true make a complete set. They don't, and distinguishing between the two is not the chief challenge in investing.The far more important component of the set is the unknowable. How do you invest when the future is path dependent. That is the question.

The idea of an extant reality is far older than you imagine. It comes from the basic western belief in a single all-powerful creator who structured.am world based on rules. God's Laws were the things that Newton was searching for. Much of the eastern religious world didn't have the basic requirement that the world had universal rules per se. Without this insight any discovery does not immediately suggest other insights. Since the world had nonbedrock principles any discovery was not as useful for unraveling the world.

Ironically, the idea of God's Law was used as a way to enforce tribal reality by application of bullshit that the rules of the world derived their power from something beyond. Because there existed.only a single all powerful creator there could only be a single way in which that creator constructed the world. This also allowed an individual to challenge.tribal reality by asserting that the tribal reality was in fact a distortion of God's Law and that the extant reality was in fact true.

The notion that there was a time when the consensus view was reliably the right one, because everybody was able to observe the same stuff? Well,... no. Adam Smith says "no" and I say "no" and reality says "no".

Your point would have been fine if you hadn't carried it to the extreme, but there have always been "experts". Often, they were the old guys and the old dames in the tribe. Everybody but one in the tribe could insist that buffalo have always come through the pass within a moon of the last snow, and the one could be right. It didn't take technology, just wider experience.

I realize that this statement - "This was the first time in human history that this had ever happened" - is meant facetiously, but you seem to believe the point behind it. If anything, the long-ago past may have been a low bullshit time, but you simply can't make the case that it was a no bullshit time.